Wealth Manager: Lloyds' fund bosses awaken sleeping giant

For an investor that controls over £160 billion and owns between 10% and 20% of several of the country’s best known funds, Lloyds could have been accused in the past of almost being a silent partner with the asset management industry.

But with Jake Moeller and Jonathan ‘JB’ Beckett now in place at the head of its funds platform this is all set to change, and change fast.

‘Lloyds has brought in two battle-hardened fund selectors with 30 years’ experience between us,’ JB (below right) says, ‘We’re here to make some noise and put fund managers under the microscope.’

The Lloyds Banking Group fund platform is a big beast with its assets invested with around 20 external fund groups, along with Scottish Widows Investment Partnership, in around 300 underlying funds.

The pair were brought in to overhaul its investment process and introduce a more qualitative element to its fund selection. They have a complementary skillset, with Moeller’s pure fund of funds background making him the ‘good cop’ while JB, who brings considerable experience of private clients and due diligence, playing the ‘bad cop’.

Moeller joined in July, having previously been head of investment research at Alico/AIG Life for six years where he managed its in-house fund of funds range, following previous stints at the Commonwealth Bank of Australia and Axa.

JB started out at JRG Financial Consultancy, where he helped establish its high net worth multi-manager proposition, before spending six years at Franklin Templeton working in fund research and due diligence within its FT Managed Investment Solutions arm.

After later stints at Standard Life and then in complex product governance at Barclays Wealth, he moved over to Lloyds in November 2010, working on fund monitoring and reporting before moving across to the fund assessment team last May, shortly before Moeller joined.

The differences between the two could not be more stark in many ways, with Moeller describing his outside interests as reading and listening to Chopin, in contrast with JB’s love of mixed martial arts and tattoos. But it is a very comfortable working relationship, with the two frequently joking together, seemingly feeding off each other’s infectious energy.

‘We have different backgrounds,’ JB says, ‘Jake is more polished and I’m grittier, as befits my compliance and risk background, but we have been brought in to bolster the due diligence and make sure all of the funds are good enough for our clients.’

Lloyds has an Edinburgh-based investment office, which has a substantial quants-based research team, and Moeller and JB have been brought in to overhaul the existing proposition and get out and about meeting managers face to face, to give the group a much louder voice in the fund market.

Their first task was to revamp the bank’s fund selection process, which resulted in all existing and potential investments being subjected to the ‘P6’ test. This puts a 20% weighting on a fund’s portfolio, process, philosophy and people and 10% apiece on performance and profile.

‘The big difference with P6 is moving away from being purely performance-based. In this market in particular, it is very dangerous to focus on performance too much,’ says JB.

‘Probably one of the most important things I have learned in my 12 years’ experience is that it is not just about headline returns and fund managers being top quartile. It is about funds behaving as they should. Do they do what you expect them to do?

‘For us, it is ultimately about taking the end client’s point of view and asking “would I buy this fund or would I sell it?” If we don’t have this level of conviction then we cannot, hand on heart, say that people should stay in this fund.

‘Our P6 process means we score blind then lock the door and argue until we reach a consensus. We don’t chase tail performance but we do take the customer’s point of view. By applying passive interrogation techniques we try to cut through the marketing and get down to the brass tacks.

‘You need to look at the human element. Does the manager get on with his traders and the risk management team? Is he comfortable with his mandate?’

Moeller adds that it is all too easy to write off a fund on the back of one-year performance, but he stresses that it needs to be put into direct context and this is where the qualitative approach really adds value.

Although Lloyds has a number of analysts looking at initial quants screens on performance, normally three year risk-adjusted returns, he says this is not the be all and end all.

‘They are useful as a flag for us to go and investigate if a fund is not performing how we would expect it to when we factor in the fund’s style bias and underlying holdings,’ he says.

He highlights Schroder UK Mid 250 manager Andy Brough as a case in point. Moeller says Brough wouldn’t score well on a quant screen, after a difficult spell at the helm of the fund, but in a recent meeting he filled Lloyds with confidence that he can turn round performance, earning the description of ‘a good manager under fire’ from Moeller.

‘Sometimes when managers underperform they can start doubting themselves and if they do that and tweak their style, then you have a problem,’ Moeller says. ‘It is important to be able to meet the manager face to face and get a decent understanding of what has gone wrong and whether it can be fixed.’

Another typical red flag is structural change at a company and this has been an issue at the forefront recently due to a spate of merger and acquisition activity in the fund management sector.

The duo met Chris Burvill at Henderson recently to get a handle on how the integration of the Gartmore business, and his new partnership with its fixed income managers John Pattullo and Jenna Barnard, was playing out. The pair say they got a good sense that it was a smooth transition.

Their first 40 meetings have all been with funds that have been flagged for these issues and where they have spotted incidences of style drift, which is again generally linked to managers chasing returns after a spell of underperformance.

Moeller says that if they have had a poor run, good fund managers must draw a line under it and stick to their guns rather than playing catch-up, insisting that a decent asset manager will have the conviction to keep backing them.

Conviction is key

Conviction is a word that crops up frequently during the meeting, and Moeller and JB insist that while the Lloyds platform will never have a pure best of breed remit, all of the funds selected are tried and trusted.

‘You need to have conviction in the funds you are selecting. I don’t think you need 10 different cautious managed or US equity funds – there is no correct number of funds to have but there is a risk you dilute your value proposition by having too much on it, which just confuses people,’ JB says.

‘But we are not a pure best of breed platform and we have a number of legacy products on there. When you are dealing with life products there can be tax considerations which make having a pure best of breed platform difficult to do.

‘The fund list we have inherited is good. The selection has been robust enough and there are no really bad funds.’

Changes to the fund list will undoubtedly be made as the pair sift through what they have inherited, but it will not be change for change’s sake, as they look to select funds on a five to 10 year investment view.

‘You need to make sure that the list is more durable than the trends that we will see come and go over the next 10 years,’ Moeller says.

‘You know a good quality equity income fund will still be around in a decade, but a lot of environmental funds were launched with a fanfare and took in little money, and plenty of sector funds have also come and gone.’

At the extreme end, the pair can hard-close a fund with their options tapering down to a soft clause or communicating their concerns about a certain manager to the financial advisers to pass on to their end clients.

Moeller does not rule out a return to the fund of funds world at some point down the line, but in the meantime, he and JB have plenty more noise to make – enough to wake up the sleeping giant that is Lloyds’ fund platform.

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